Fannie Sells Big, but Loses Big – What Does That Mean for Private Note Holders?

On February 26th, 2009 Fannie Mae sold $15 billion in two year notes. Now that it’s back by the federal government the GSE seems to have actually become the safe haven that investors believed it was before the real estate bubble popped. On the other hand, Fannie Mae’s value also dipped below zero for the first time, prompting a $15.2 billion draw from its federal credit line.

This upturn in investor confidence in Fannie Mae is good news, indicating that people are more confident that eventually, mortgages will return to reasonable values under a set of safe, federally-supervised practices. Fannie Mae predicts housing demand will continue to fall in 2009, however, so even though investors feel better about the GSE, it’s still hurting due to poor trends in the market it serves.

If Fannie Mae regains investor trust, will this help yank the larger real state market back into shape? The federal government hopes so, but one unfortunate fact of the bubble is that it very much relied on rashness that regulators clearly won’t tolerate any more. This makes it likely that while real estate will bounce back to moderate health in perhaps a year’s time, the frenetic market of the past may never return.

If you’re a private mortgage note or deed of trust holder, your main concern is real estate prices. If the government administers TARP, HASP and other programs properly, and banks do what they’re supposed to people won’t be moving, flipping and investing as readily, but the market will also stop bleeding due to foreclosures and depressed demand. (Admittedly, there are a lot of “ifs” in this equation.)

A return to stability will be good for you, because you won’t be forced have to offer seller financing in a depressed market. –and now that subprime mortgages are finished, you can pick from a larger pool of borrowers. (There are lots of people in this pool you shouldn’t pick, but as we’ve said before there are people who have money but fall between the cracks, qualification-wise, such as the self-employed.)

The disadvantage is that if you built your note’s terms based on the good old days of explosive growth, those days probably aren’t coming back any time soon and your borrower may be chafing at those terms. As the note holder you are of course free to modify those terms, but it’s a tricky decision that requires real expertise. This is another reason you might want to sell your mortgage note. If you’re only considering seller financing, wait for recent events to trickle down into your local market in a sustained fashion (perhaps a quarter or more) before you make your move.